VW slumps to third-quarter loss on emissions scandal

FRANKFURT -- Volkswagen Group slumped to a third-quarter operating loss over costs related to its rigging of diesel emissions tests, its first quarterly deficit in more than 15 years.

The company posted a 3.48 billion euro ($3.84 billion) third-quarter operating loss, compared with a 3.23 billion euro profit a year ago.

The cheating scandal accounted 6.7 billion euros in special costs in the third quarter, more than the 6.5 billion euros it originally set aside, VW said today.

The company said sales revenue rose 5.3 percent to 51.49 billion euros, partly due to positive influences from exchange rates and mix effects.

"The figures show the core strength of the Volkswagen Group on the one hand, while on the other the initial impact of the current situation is becoming clear,” CEO Matthias Mueller said in a statement.

VW is bracing for costs that analysts have estimated could total from 20 billion euros to as much as 78 billion euros.

Mueller said the cost of the scandal would be "enormous, but manageable," without giving details. He said VW had hired consultants Deloitte to support an investigation by U.S. law firm Jones Day, and that those responsible would face tough consequences, without elaborating.

Mueller also said VW would focus more on profitability than sales volumes in future. His predecessor, Martin Winterkorn, set VW the goal of becoming the world's biggest carmaker by sales volumes, and critics have said this may have inadvertently led to the use of software that allowed VW to disguise the level of real toxic emissions in its diesel engines.

Fallout 'contained'

Analysts today said VW has so far contained the financial fallout from the scandal after its namesake car brand boosted third-quarter margins and provisions to cover fines and recalls rose only moderately.

The VW brand faces the biggest impact from years of cheating on diesel emissions. The brand widened its return on sales to 3 percent from 2.8 percent a year ago.

VW's net cash and liquid assets jumped 29 percent in the quarter to 27.8 billion euros after it sold a 19.9 percent stake in Suzuki Motor Corp. Reserves may keep growing in the fourth quarter when proceeds from a transaction involving VW's holding in financing company LeasePlan, valued at 3.7 billion euros, are expected to be booked, analysts said.

"We see it as a positive signal that VW has pretty much kept the provision (of 6.7 billion euros) for the scandal unchanged," said Arndt Ellinghorst, an analyst at Evercore ISI. "Together with the very strong net liquidity, this should reassure both equity and fixed income investors."

VW's liquidity surge, as well as the limited rise in provisions for the diesel scandal, are positive signs for its ability to weather the crisis, said Sascha Gommel, a Frankfurt-based analyst with Commerzbank. "I expect VW to have a high degree of visibility on what is needed to fix the cars by now, so there would be a high degree of confidence" behind its provisions figure, he said.

VW shares were trading up 1.1 percent at 106.3 euros at 13:22 GMT. Volkswagen has lost some 21 billion euros in market capitalization since the scandal became public on Sept. 18.

Legal liabilities

VW's costs so far are largely related to the refitting of affected vehicles, and Mueller has said they are likely to rise because the company is not yet in a position to estimate its potential liabilities from lawsuits.

"It is currently impossible to assess the legal risks connected with the diesel issue due to the early stage of the comprehensive and exhaustive investigations, the complexity of the individual factors and the large number of open questions," the company said in its quarterly report. "As a consequence, corresponding provisions have not been recognized in the interim financial statements."

The company said full-year operating group profit will come in "significantly below" year-ago levels because of costs related to the emissions scandal. Excluding costs of the diesel scandal, VW still expects its group operating margin to come in between 5.5 percent and 6.5 percent this year, after 6.3 percent in 2014.

VW stuck to its guidance for full-year deliveries to be on a par with last year's record 10.14 million auto sales.

The company confirmed the third-quarter loss was its first quarterly loss in at least 15 years but, due to accounting changes, was unable to say precisely when the last loss occurred.

Investment cuts

VW Group plans to cut investments by 1 billion euros a year at its core division, which accounts for 5 million cars to be recalled. Luxury division Audi, source of about 40 percent of VW group profit, will also cut planned spending.

VW may need to set aside more money for measures to stabilize sales if deliveries take a hit from the scandal, Mueller has said. Steps could include discounts on new cars if owners turn in old models as well as cheap loans and incentives to dealers to buy back older cars.

Group deliveries, which also include premium brands Audi and Porsche, slid 1.5 percent in September to 885,300 cars and fell 3.4 percent in the third quarter to 2.39 million cars, causing VW to drop behind Japanese rival Toyota in nine-month global auto sales charts after clinching the top spot three months earlier.